Bernard Mpofu, Chief Business Reporter
A UNIT of frontier markets business giant has warned of a run on small banks, triggered by a prolonged absence of a lender of last resort and a chronic liquidity crunch on the domestic market.
Renaissance Capital (RenCap) said large banking institutions, currently accounting for 97,33 percent of total deposits in the formal banking system, may weather the storm prevailing on the market but warned the small banks could flounder.
The Reserve Bank of Zimbabwe (RBZ) has been unable to play its lender-of-last-resort role due to cash constraints.
"In the current environment, we believe the banks with the highest market shares in deposits and the lowest loan-to-deposit ratios are better placed to weather the storm. This would favour the international banks (Barclays, Stanbic and Standard Chartered) over the local players. Those banks with high non-performing loans (NPL), lower NPL coverage, high loan-to-deposit ratios and low deposit market shares are undoubtedly the most vulnerable, in our opinion.
"Under the present multi-currency system, the RBZ is unable to ease liquidity shortfalls by supplying short-term adjustment credit. The risk of the RBZ not having a lender-of-last-resort function is that a liquidity crunch, such as the one Zimbabwe is currently experiencing, can lead to panic-withdrawals from banks that have temporarily limited liquidity. At the same time, banks that could provide liquidity are reluctant to do so for two main reasons.
"First, with high dependence on short-duration demand deposits, banks need to ensure they always have sufficient cash to meet withdrawal requests from their own customers. Second, the counterparty risk of participating in the interbank market falls fully on their balance sheets. With the RBZ and Ministry of Finance cash-strapped, there is no last lender to guarantee the interbank liabilities of the weaker illiquid banks. The lenders would be left with little recourse on any non-performing interbank loans."
RenCap said given Zimbabwe's recent banking history, where retail customers lost savings during the dollarisation process, banks may not find it easy to raise significant funds from the retail base, especially longer duration deposits.
The central bank indicated that short term deposits which comprise of demand, savings and under 30-day deposits constituted 89,3 percent of total deposits in the banking sector as at November 30 2012.
Consolidated deposits held by banks amounted to US$3 254,5 million as at 30 November 2011, representing an increase of US$958,2 million (41,7 percent), compared with US$2 296,3 million realised during the comparative period in 2010. Official figures however indicate that year-on-year growth in deposits has, however, progressively declined from 80 percent in September 2010 to 40 percent in September 2011 before marginally rising to about 50 percent in November 2011.
Reserve Bank governor, Gideon Gono, last week said he would closely monitor the asset quality of banks amid concerns that the increasing rate of non-performing loans could further worsen the liquidity constraints.
"The Reserve Bank has, however, noted with concern the gradual deterioration in asset quality as reflected by the level of non-performing loans which is now trending towards the watch list category. Asset quality challenges can potentially heighten liquidity risks given the current operating environment where credit is largely financed by volatile short term deposits. In this regard, it is imperative that banking institutions enhance their credit risk management systems with special emphasis on credit assessment, origination, administration," monitoring and control standards," said Gono during the presentation of his Monetary Policy Statement.
RenCap said its view on non-financials was that businesses with positive working cycles and/or the ability to borrow locally at favourable rates or source external funding are better placed, such as Delta, Econet and Innscor.
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